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Ukraine: Rising Fuel Prices Respond To Supply And Demand

Boston, 26 July 1999 (RFE/RL) -- Angry motorists in Ukraine reportedly suspect that Russia is to blame for their soaring gasoline prices. But evidence suggests that the market is only responding to the forces of supply and demand.

Last week, Ukrainian gasoline prices nearly doubled due to shortages that closed many service stations and left drivers stranded. The government quickly turned to Azerbaijan for 500,000 tons of diesel fuel to keep the country's farm equipment from shutting down.

Ukraine's long history of disputes with Russia over debts for natural gas supplies may make Moscow a familiar target of suspicion whenever Kyiv runs short of fuel. There is little doubt that Russia has tried for years to gain control of Ukrainian pipelines and energy infrastructure to end Moscow's reliance on the country for transit to Europe. Ukraine has also used its position to delay payments for supplies and bargain for subsidized fuel prices.

But in this case, Russia and other oil suppliers seem to be doing only what comes naturally. With the near-doubling of world oil prices since February, Russia has increased its crude oil exports, hoping to take advantage of higher market prices while it can.

Reports indicate that less oil is being made available to refineries throughout the region so that more can be exported. In addition, higher oil prices have raised the price of refined products, even for Russia, which must buy some fuels abroad.

The price hikes have led Russia to reduce its own imports of fuels, said Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington.

"Now, with the jump in oil prices, everybody is doing what they can to maximize exports of crude oil and minimize imports of fuel," said Ebel.

Similar fuel shortages have been reported in Armenia, a Russian ally which relies heavily on energy supplies and favorable prices from Moscow.

Gasoline prices have also risen sharply in Kazakhstan, which is a major exporter of oil. Some refineries in Kazakhstan are working at half-capacity or less, while the refinery at Pavlodar reportedly ran out of oil five months ago.

As Kazakhstan struggles to gain hard-currency earnings, its petroleum industry has taken advantage both of higher oil prices and Russia's decision to allow greater access to its export pipelines this year. The combination of factors has left domestic refineries dry. For countries that must import refined products, the situation is aggravated because domestic fuels may often be subsidized by the government and sold at a loss.

In Ukraine, higher import costs for fuels are already driving down the value of the hryvnia. The currency problem could lead to a spiral, making foreign fuel even more costly in local terms. In one possible sign that Russia is blameless, the Russian oil company Lukoil has moved quickly to sell Ukraine 300,000 tons of fuel in order to avoid damage to the country's grain harvest, on which Russia may depend this year.

But aside from market forces that are being felt throughout the region, Ukraine seems to have taken some steps that have worsened its own plight, suggesting a basic misunderstanding of the laws of supply and demand.

Ukraine raised duties and taxes on fuel in March but was forced to cut them last week after the higher prices discouraged imports. It also placed price controls on low-octane fuel, making it almost certain that scarce supplies would be sold for more money somewhere else. After nearly eight years of independence, the effect of decades under a command economy may still drive policy decisions, especially regarding basic supplies such as fuel and food. Agriculture and fuel are inextricably linked. As long as food production is subsidized, there must always be pressure to control the price and supply of fuel. Ukrainian authorities are already predicting a decline in the harvest because of the fuel crisis.

Ironically, Azerbaijan may be in a position to benefit from the current troubles because of other problems involving Russia. Azerbaijan's state oil company has been largely unable to export crude oil this year because of constant disruptions on the Russian export pipeline running through Chechnya to Novorossiisk.

Azerbaijan recently threatened to suspend exports through Russia altogether, saying that it might use its oil for refining instead. If the country now turns to producing fuels, it may find that its supplies are in great demand.